Fed: Swan says spending cuts to start at government level

AAP General News (Australia)
12-17-2007
Fed: Swan says spending cuts to start at government level

By Colin Brinsden, Economics Correspondent

CANBERRA, Dec 17 AAP - Federal Treasurer Wayne Swan said spending cuts should start
at government level to dampen inflation, as a leading economist warned of further interest
rate rises next year.

Mr Swan said this Thursday's meeting with states and territories at the Council of
Australian Governments (COAG) will also be looking at ways to build the productive capacity
of the economy.

"The inflation pressure has been building for a long period of time, it will take some
time to deal with," Mr Swan told journalists in Canberra.

"I think the most important thing we can do is to have a new era of fiscal discipline
and the commonwealth ought to start with itself.

"We do need additional savings, we do need to work with the states to expand the productive
capacity of the economy."

Independent forecaster Access Economics says Labor's promised razor-gang should take
the hatchet to family benefits and national security to help stem the tide of rising interest
rates.

Access director Chris Richardson says the tax cuts of recent years have pushed up interest
rates, and Labor's planned tax cuts does risk a further increase in rates.

"Australia is increasingly choking on its own prosperity," Mr Richardson told journalists
in Canberra.

"Times are too good, and that's the problem, it means tax cuts of recent years have
pushed up interest rates and that's what the new government has inherited."

He said the Labor government needs to break the nexus between tax cuts and interest rate rises.

"I'm pretty sure there is nothing it can do to avoid an interest rate rise in February, he said.

"The question is whether it can avoid one in the middle of 2008, and that comes down
to the quality of its first budget."

He said politically Labor's promised $31 billion of tax cuts from July next will have
to stay, but need to be countered by severe spending cuts.

Mr Richardson said the two biggest areas of increased spending in recent years have
been in family benefits - much not means-tested - and national security.

"That might have been necessary but it's not completely clear that it has been successful,
that it's either making Australia that much safer, fairer or more prosperous," he said.

The forecaster described the Howard government's spending decisions in recent years
as "positively Whitlamnesque" - handing back more than half of the China-driven revenue
windfall in a series of personal income tax cuts and directing the rest to increased spending.

Mr Richardson said that it take two parties to manage the economy - the federal government
with the budget and the Reserve Bank with interest rates.

"Canberra gave up," he said.

"It took its hands off the wheel in recent years and just acted as a post box between
the prosperity being fed us by China and the punters it handed it all over to in personal
income tax cuts and more and more spending."

"The Reserve Bank has hinted it would like the government to be doing more to take
some of the strain and its got to do that to avoid more interest rate rises."

AAP cb/sb/it

KEYWORD: ECONOMY NIGHTLEAD

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